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August 7, 2012

Latest Posts from Economist's View


Latest Posts from Economist's View


Posted: 19 Jun 2012 04:32 AM PDT
New column:
Extreme Politics Will Make the U.S. the Biggest Loser
Republican extremism is hurting us in several ways.
Posted: 19 Jun 2012 04:23 AM PDT
The International Reporting Project took us to the Kibera slum today, everyone here says it's the largest slum in the world (though Wikipedia says it's third), and we heard presentations from youth groups, Doctors Without Borders, and others. We also broke into small groups and interviewed families -- we were free to ask anything we wanted -- about half of which were HIV positive.
Kenya 1672
Kibera
It's hard to understand how many of them make it at all. Rent for a dirt-walled shack is 1500 shillings per month (the exchange rate is approximately 80 to 1 so this is around $18.75 per month). All of the people we talked to were casual laborers, and they found work when they could doing things such as knocking on doors and asking if people needed their clothes washed. But the income they bring home, at least as far as I could tell, was hardly enough to pay the rent, let alone buy food (many ate once per day, one woman said she waited until just before bedtime to feed her kids since they didn't sleep well if they were fed earlier).
Kenya 1630The Sewage System
As for infrastructure, they get water from the government twice per week, maybe (Tuesdays and Sundays). At other times they have to buy it. If they want to use anything but a hole in the ground to go to the bathroom, they must pay 10 shillings (only 6 toilets are plumber for 1 million people, the sewage dumps into trenches running along the roads -- even the outhouses, a generous term for what they actually are -- were shared by 50 or more families).
Kenya 1676
He has aids, his wife is virus free
Nevertheless, the economy was more vibrant than I expected. There is the small economy inside of the slum as they trade with each other, but more importantly there is a huge daily flow of people out of the slums to do work in the industrial and service sectors (mostly by foot, and the walk long ditances daily).
Kenya 1678
Food Stand
The money from working, when they can, comes back to the slums, but there are all sorts of corrupt institutions that take it right back out. Because of this, e.g. making them pay exorbitant amounts for water and charging rent on land that is supposed to be free, the money they bring home (and money from aid programs, etc.) flows back out of the slum, and guess who loses on the exchange due to the unequal power relationships in every transaction they face?  (When asked, they say the rent is for the structures, not the land, but one of the reporters on the trip made a good point -- how did the landlord get control of the land in the slum so that they could put these shacks on it? What power enforced and allowed them to control land that is supposed to be free? What corruption allows this outside control?) 
Kenya 1632School
Another disappointment is that they seem to understand that schooling is one way out. I asked lots of kids this question in the home visits, and without prompting they all said school was their best hope (one 8 year old boy wanted to be a pilot). But school is not free, they must pay, so the kids only get spotty lessons here and there, if at all (there was some confusion here, some said elementary school was free, but most don't go in any case). There are a few schools run by NGOs, but the kids must perform well enough to be accepted and the need far outweighs the opportunity so the lines are rather strict. Nevertheless, for those who do get in you could see that they looked healthier and happier, perhaps due in no small part to the fact that they are fed once a day at school (for one child we talked to, and surely more, that was it for the day).
Kenya 1628
Trees are used for fuel, and are mostly gone
Kenya 1668
Charcoal is used too -- if you have 35-45 shillings
One final observation. At first I thought the key to helping these people would be to create more jobs in the industrial sector -- to bring them regular, dependable incomes from this low-skill employment. There are also huge infrastructure needs that go unmet. For example, when asked why they only get water from the government twice per week, they answer that there's not enough water to serve all the slums every day, so the government must ration. But from what I understand, there's plenty of water, it's the infrastructure to supply it that is missing (I was told a lot of water is diverted into flower production). So jobs and basic social services are a first priority.
Kenya 1660
Those solid walls that landlord build
(fleas, bedbugs, etc. hide in the walls)
But I'm starting to understand how corruption interferes with the development process. There are, for example, many phantom schools -- schools on the books that were paid for by government money, but the schools don't actually exist. The same is true for health clinics, and for other money intended to help the poor. So its easy to call for more social services, and the government sometimes answers, but how much of it reaches its intended destination? I don't know the exact figure, but it's nowhere near what's allocated from what I heard today (no politician has ever been jailed for corruption, there was one removed from office over corruption in school construction, they admitted the problem and repaid donors to compensate for what had been stolen, but the president reappointed him the next day so there was no real penalty even in this case).
It's been a long first day, and I haven't really had time to digest all of this -- it was a bit surreal and it never really hit me that I was in a slum in Kenya -- so these are just a few observations from the first day. Hopefully, the picture and the economics, cultural, and social forces driving all of this will clear up a bit over the next nine days (if any development economists woud like to weigh in, that would be great).
[Note: I posted this sooner than I intended -- two more background posts on Kenya along with the links post will appear overnight below this one.]
Posted: 19 Jun 2012 04:05 AM PDT
Tim Duy:
Two Days Until the Fog Lifts, by Tim Duy: Some additional stories to consider as await the outcome of this week's Fed meeting. First, tonight's Jon Hilsenrath WSJ article detailing the Fed's concern about the credit divide:
The housing bust left behind millions of people with credit records damaged by plunging home prices, lost jobs, past overspending or bad luck. Many are now walled off from the low interest rates engineered by the Federal Reserve to spur the economy and remedy the aftereffects of the borrowing boom...
...Shrunken access among credit have-nots is triggering more than personal plight. It has weakened the influence of the Fed—one of the best hopes for spurring stronger economic growth—and raised doubts within the central bank about whether it is doing much to reduce unemployment...
That underwriting conditions have tightened dramatically is not exactly a new story - as Hilsenrath writes, the Fed released a report urging Congress to take action to ease credit conditions in mortgage markets. What is interesting is the timing, coming just two days ahead of what is likely to be a somewhat contentious FOMC meeting. The underlying context of the story is that if credit market channels are clogged, additional action on the part of the Federal Reserve will have little impact. Consider this in terms of the risk/reward trade off that Fed official like to cite when discussing options for additional easing. They may be hesitant of taking the risk that all they get from additional easing is criticism from lawmakers - and no shortage of it during an election year - in return for very little benefit.
The article also highlights the Fed's fetish with low interest rates. They should forget about trying to keep interest rates low, and instead enact policies that support enough growth such that interest rates begin to rise. This is of course how policy is supposed to operate - long-term rates rise as market participants believe the Fed will need to raise short term rates in response to real inflationary pressures, not just the phantom ones in the minds of a subset of monetary policymakers.
With that in mind, Zero Hedge posts Goldman Sachs' FOMC preview Q&A. Goldman is expecting a new round of QE, largely on the expectation that the Fed will significantly mark down its economic forecast as well as feel a need to respond to the European crisis (in effect, doing the job the ECB has abdicated). This is a greater policy response than the more generally expected extension of Operation Twist, but also a completely reasonable expectation given the some of the Fedspeak we have heard. Goldman, however, suggests the Fed might go one step further:
If it is specified as a "stock" of purchases, we would expect a similar size as in past programs, i.e. $400bn-$600bn over 6-9 months. However, it is also possible that the program would be specified as a "flow" of purchases of perhaps $50bn-$75bn per month.
I believe the emphasis was added by Zero Hedge. Given that the Fed has repeatedly emphasized that it is the stock of holdings, not the flow, that is important, this would represent a major policy shift. The Fed would be finally utilizing the expectations channel, effectively promising to hold policy steady rather than promising a discrete end date.
While I would greatly welcome open-ended QE, it seems like a pretty big leap for a central bank that just a few weeks ago was expected to hold policy constant. Moreover, I am hard-pressed to say that economic or financial conditions have deteriorated such that the Fed would shift gears so quickly. This doesn't feel like 2008. I am not even sure it feels like last fall when the Fed embarked on Operation Twist. That said, the Fed might suspect, or know, that Europe is going down the tubes on the back of some let's just say some questionable economic policy making. Better to get ahead of that curve. Well ahead.
Bottom Line: More grist to chew on as the Fed's two-day meeting begins, with one take away that the Fed might opt to do less than expected, and another much more.
Posted: 19 Jun 2012 04:02 AM PDT
Tim Duy (I missed this one yesterday):
The Monday After, by Tim Duy: Today is the first day after the "crucial" Greek vote. Except that vote was probably not all that crucial. Nothing fundamental has changed in Europe over the weekend. At best, all that has been accomplished is pushing out the end-game once again.
The Financial Times reports that Greece is on the verge of forming a government:
Antonis Samaras, leader of Greece's New Democracy, began talks to form a coalition government on Monday following his party's failure to secure an outright majority in the country's election.
If Europe thought this would be the end of the story on the last bailout, think again:
Mr Samaras told reporters after his meeting with Mr Tsipras that he would invite all pro-European parties to join a coalition government.
He also restated his determination to seek "alterations" to the bailout by renegotiating the terms with Greece's creditors.
Bloomberg reports that German Chancellor Angela Merkel just says "nein" to such bluster:
German Chancellor Angela Merkel said Greece shouldn't be granted leeway on terms for its bailout, rejecting signals from her foreign minister that creditors may relent on austerity measures...
..."The important thing is that the new government sticks with the commitments that have been made," Merkel told reporters at the G-20 meeting in the Mexican resort of Los Cabos. "There can be no loosening on the reform steps."
Yes, another showdown is certain. Merkel will give up only the slightest sliver of ground, almost ensuring the Greek economy remains locked in a never ending cycle of austerity. And according to rumor this is exactly why Alexis Tsipras, the leader of Syriza, has no interest in joining with New Democracy in a coalition government, instead leaving the inevitable failure of this next bailout on the shoulders of his opponents.
And while the world learns about Greek politics, the real story is Spain. Clearly, market participants saw nothing good in the Greek results for the trajectory of Spain's problems. Yields on 10-year debt surged solidly above 7% today:
Spain
Of course, if European policymakers expected a pro-Euro Greek outcome to bring relief to Spain and Italy (now above 6%), they were sure to be disappointed. Hopes for a firewall around Greece are so 2011. The fire has already jumped that line, and it looks as if Europe has yet to send any firefighters to battle the blaze. Meanwhile, the only institution that can move quickly remains committed to standing on the sidelines. To be sure, ECB President Mario Draghi signalled that the ECB has room to move, but he did not signal the timing. For the sake of the Spanish people, it really needs to be sooner than later.
Bottom Line: This Monday feels like all the others. The latest Greek vote is behind us, but the the dysfunctional political and economic system that is Europe remains.
Posted: 19 Jun 2012 03:24 AM PDT
Congress is unlikely to renew the trade agreement with African countries known as the African Growth and Opportunity Act:
Rule to Encourage Africa Trade Set to Expire, by Neanda Salvaterra, WSJ: A clause in a U.S. trade law designed to stimulate trade with Africa is set to expire Sept. 30 and, so far, there appears little prospect that it will be renewed by Congress.
At issue is a provision in the African Growth and Opportunity Act, which was passed with bipartisan support by Congress in 2000 and gives 40 African countries tariff-free access to the U.S. market. Some 90% of exports to the U.S. from Africa since then have been oil.
But a clause called the "third-country fabric rule" has been successful in encouraging the growth of African textile and apparel manufacturing, which is part of the development goal of AGOA, as the law is known. ... But the provision had a built-in expiration date of Sept. 30, 2012. And, so far, there appears to be little prospect Congress will renew it.
The reason: partisan bickering, says Witney Schneidman, a former deputy assistant secretary of state for African affairs under President Bill Clinton who recently authored a report on AGOA for the Brookings Institution.
Few bills have made it to a vote in Congress this year. Any bill, including an extension of the third-country rule, that comes up for a vote therefore runs the risk of having a range of legislation appended to it that otherwise is unlikely to reach the House floor. ...
Renewing the provision isn't a pressing issue for U.S. manufacturers as the African third-party garment provision represents a small part of overall U.S. textile imports. But the rule has generated $800 million in exports and a lot of jobs in Africa where oil extraction generates few employment opportunities for medium and low skilled labor. ...
AGOA , which is set to expire in 2015, was crafted at a time when the U.S. focus was aid and not trade. According to Mr. Schneidman, this needs to change, if U.S. firms are to compete with countries like China which has engaged Africa with an estimated $ 73.4 billion in export trade. ...
Here's more from Brookings:
Summary In May 2000, President Bill Clinton, as a part of his leadership in enhancing ties between the U.S. and Africa, signed into law the African Growth and Opportunity Act (AGOA), a historic piece of legislation that provides preferential duty-free access to U.S. markets for nearly 6,400 product lines from sub-Saharan Africa. With the goal of both supporting business in the United States and critical political and economic reforms in African countries, AGOA has created an estimated 300,000 jobs on the continent and contributed to the region's emergence as one of the world's fastest growing markets, with total U.S. exports to sub-Saharan Africa tripling between 2001 and 2011. Today, AGOA stands as the cornerstone of the U.S.-African commercial relationship. AGOA is set to expire in 2015 and U.S. Secretary of State Hillary Clinton and the U.S. Trade Representative Ronald Kirk have called for a "seamless renewal" of the act. This commitment to extending AGOA has led to a new policy debate over the length of the extension, how to strengthen the act, and how the U.S. can increase its commercial presence on the continent given the expanding influence of China, India, Brazil and other large emerging economies. ...
Posted: 19 Jun 2012 01:07 AM PDT
Via Brookings, one of the many things I read/watched to get ready for the trip to Kenya:
In many African countries, women still cannot own land or resources, a significant barrier to their ability to start businesses and take advantage of the continent's economic potential. Fellow Anne Kamau explores their plight.

Challenges for Women in the African Economy
Posted: 19 Jun 2012 12:06 AM PDT

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